Key Points: 

  • Iron ore and copper prices have jumps on the reopening of China
  • Miners' fair value estimates generally increased with higher commodity prices, but there are still buying opportunities in coal. 

In this episode of Q&A Your Way, Morningstar equity analyst Jon Mills explains what the reopening of China's economy means for Australian miners, and where investors can find undervalued stocks in the sector.


Jon Mills: James from Instagram has asked, "What are the broader implications from China's borders reopening for the Aussie stock market and does this present any opportunities? I'm cautious of making any decisions within a volatile market right now."

Well, James, that's a very good question. So, by way of background, for the past three years or so, China had been trying to impose a zero COVID policy and that involved big restrictions on its populace, including lockdowns. Recently, the Chinese government has just done a quick 180. And so, that is actually very good for Australia because our biggest exports remain commodities such as iron ore and coal, and China just happens to be the world's biggest customer for those commodities. For instance, it accounts for about two-thirds of seaborne iron ore demand and more than half of global copper demand. And so, that should be good for the mining sector, in particular, major miners such as BHP (BHP) and Rio (RIO) and Fortescue (FMG).

Now markets are forward-looking. And so, what has happened in response to that policy is you've had big increases in commodity prices, specifically iron ore, which is now about US$120 a ton and copper which is around US$4.20 a pound the last time I looked. And so, the miners that produce those commodities amongst others have really increased in price. And if we look at our current mining coverage list, most of our mining coverage list is either fairly valued or above fair value. The exceptions are in thermal coal. And another good thing that's happened recently is, we've had a reset of Australia's relationship with China under our new Prime Minister, Anthony Albanese. And so, China is going to, if it hasn't already, start importing Australian coal again. And so, that's good for our coal miners, and it's also good for the economy in general.

In relation to concerns over volatility, China is one of the biggest sources of the current volatility. But there's also the continuing increase in interest rates by the world's central banks. I think volatility is actually a good thing because it provides buying opportunities if that volatility pushes share prices down. And so, as share prices go down, there are more opportunities to invest and to take advantage of that downside volatility. And always compare the price of the business – or the shares you're considering purchasing with what you think the fair value of that business is.